Government Motors

At 8 AM today General Motors, the second-oldest member of the Dow Jones Industrial Average (founded in 1908 and added to the Dow in 1925) filed for bankruptcy protection.  GM reports $173 billion in debt and $82 billion in assets; the net $91 billion deficit makes it the fourth largest bankruptcy in US history.

In 2006, the entire gross domestic product of Venezuela was only about $10 billion more than GM’s debt.

Over the next 60-90 days, the company plans to restructure into “New GM”, to eliminate Saturn, Hummer, Saab and most of Pontiac (by selling the divisions where possible) and continue with GMC, Cadillac, Chevrolet, and Buick while closing about a dozen plants, eliminating 21,000 jobs (just over 1/3 of its total headcount) and closing about 40% of their 6,000 dealerships.

Despite these apparently large cutbacks, unfortunately little — at least little of what put GM in this position to begin with — will change at GM and the changes which do occur will cost taxpayers dearly.  Indeed, GM’s restructuring will likely be seen in 20/20 hindsight as the greatest Democratic vote-buying earmark in history.

In a noon press conference on the subject, President Obama once again blamed the problem on having “inherited” a financial crisis and tried to claim credit for GM’s plan “meet(ing) strict standards I laid out.” His attempts to make the current events look like an exercise in fiscal responsibility border on the bizarre, as did his statement that “none of the stakeholders (received) special treatment because of government involvement.” Obama also noted that it has been “extremely difficult to find common ground among stake holders.”  I’m sure GM’s bondholders agree.

Over the weekend, bondholders representing an estimated 54% of GM’s outstanding unsecured debt accepted a sweetened offer which gives them 10% of “New GM” as well as warrants to buy an additional 15%. This followed a failed exchange offer last week, and the low acceptance number of 54% shows that bondholders recognize both that they’re getting shafted and that with the power of government working against them, they may have little choice but to take what crumbs they’re offered.

The US Government will put another $30.1 billion into the company, for a total of nearly $50 billion, which was supposed to be a loan but which the government will now convert into a 60% ownership stake in the company.  The governments of Canada and Ontario will “lend” an additional $9.5 billion to GM which will then be converted into about 12.5% ownership of the company. The United Auto Workers union will own 17.5% of the company. In a stunning transfer of wealth from private investors to government and unions, the UAW will own 75% more of the new GM than the investors holding $27 billion of debt to the existing company, even though GM’s own bankruptcy filing shows that the “employee obligations” to the UAW are billions of dollars less than the debt owed to bondholders. And bondholders will get 1/6th the ownership stake of the government despite having lent more than half as much money to GM.

Existing shareholders will be wiped out. If you were one of the many Americans who avoided losing money investing in GM, never fear: Barack Obama will fix that for you.  We’re all about to lose money in Government Motors in a brazen scheme to reward unions for all they’ve done (and will be expected to continue to do) for Democratic politicians.

In his press conference, Obama said that the government is a “reluctant shareholder”, that he “has no interest in running GM”, and that “the federal government will refrain from exercising its rights as shareholders on all but the most fundamental decisions.”

A little math is in order to show how Barack Obama’s investment decisions will be little better for taxpayers than Bernie Madoff’s plan was for his investors:  The government’s conversion of nearly $50 billion in debt into a 60% stake in the company implies a total company value of $83 billion.

While a detailed valuation analysis will be left for another time, it bears mentioning that the highest total stock valuation GM ever achieved was about $52 billion in April, 2000. Yes, you read that right:  President Obama is “investing” in General Motors with your money at a price about 60% higher than the highest price at which GM has ever traded.  The chance that taxpayers will ever get their money back — or even a significant fraction of it — is vanishingly small.

An analyst on CNBC said today that GM bonds are trading at a price which implies a $25 billion value for “new GM”, at the same time that President Obama was trying to justify spending taxpayer money at three times the price by saying that “We’re making these investments not because I want to spend American people’s tax dollars but because I want to protect them.”  Well, he’s certainly protecting something, but it’s not your tax dollars.

GM claims that their new breakeven point will happen when 10 million cars are sold annually in the US.  This is down from a 16-million breakeven rate prior to bankruptcy. However, the current rate for the entire nation is 9.5 million cars and GM is clearly making an assumption, likely an optimistic one, about their market share. Even with the lower sales target, there is reason to wonder whether Government Motors will be more competitive than General Motors was, particularly without the discipline of shareholders who actually care about profits and with a meddling government forcing the wishes of radical environmentalists into the company’s plans and operations.

In a press conference, GM CEO Fritz Henderson emphasized that the company will be more competitive and smarter — and I believe he’s sincere in those intentions — but it’s hard to believe that reaching those goals will not be hampered by new GM’s government and union ownership.

The new ownership structure spells further financial troubles for GM and further losses for you and me. Analysts are already warning that the government’s apparent push to force the company to sell small “efficient” cars (far less profitable than SUVs and trucks) means that new GM will have a hard time selling cars unless gasoline is roughly twice its current price. (But again, have no fear, that’s just what the Democrats want to do.) Highlighting the point about Government Motors likely competitiveness, a former CEO of United Airlines said in a CNBC interview this morning, “I’d love the opportunity to compete against a government-owned entity (again).”

Even in bankruptcy, taxpayers don’t get a truly clean start: GM will have debt of $2.5 billion to the UAW as well as issuing them $6.5 billion of preferred stock which will pay almost $600 million annually. And the US government will receive $9 billion in debt and preferred stock.

This generous treatment of the union and government in comparison to the private bondholders is the second “cram-down” in as many months, following the government’s reported threatening of Chrysler bondholders.  And while one can’t blame the UAW for getting the best deal they can, it is surely a sign of our nation’s creeping economic fascism that the government, which should be a neutral referee following our nation’s laws which protect private property, is forcing GM’s current bondholders to accept a deal that would be unthinkable without some sort of subtle threat against them.

The horrendous treatment of bondholders in comparison to the union cannot be overstated.  Last week Ron Gettelfinger, the president of the UAW said that GM’s retirees will see 25% reductions in their health care benefits under the plan.  Compare that to the cramdown forced on bondholders: They are getting 10% of the new GM which, if you accept the administration’s implied valuation of $83 billion, means they’re losing 70% of the value of their investment, reduced slightly by the value of the warrants they’ll receive.  A more reasonable valuation would show the bondholders losing 90% or more. The UAW’s response was telling: “Most bondholders are investors who can spread any losses across a broad portfolio.” In other words, it’s OK with them — and unfortunately with the government — to pillage other people’s retirement funds (the largest source of bond investment funds) in order to shore up auto workers’ health insurance.  As a CNBC anchor asked, “Why is it that the UAW gave up almost nothing here?”

A Sunlight Foundation analysis of UAW PAC contributions says “Of all 207 lawmawkers receiving campaign contributions from the UAW PAC in 2008, only two are Republicans.” And one of those was Arlen Specter. The analysis concludes “UAW PAC contributions are definitely a strong predictive force in how a member will vote (i.e. for using taxpayer money to bail out the auto companies), but partisan identification appears to be a stronger force here.”